Archive for September 13th, 2007

The issue on global imbalances has been there for quite some time but the debate on the same was started by the speech given by Bernanke in April 2005 . The speech became a rage for its global saving glut hypothesis. Number of papers then followed on the subject highlighting the various factors responsible for global imbalances. I have several posts on the same here.

Bernanke revisited the subject recently (Sep 11, 2007) and gave yet another super speech. He first summarises his previous thoughts, then updates the developments and finally presents fresh insights on the subject.

Here are a few facts:

The U.S. current account deficit has widened further in the past two years, from $640 billion in 2004 (5.5 percent of GDP) to $812 billion in 2006 (6.2 percent of GDP). In an accounting sense, the increase in the U.S. deficit over this period reflects primarily an increase in the investment rate from about 19 percent of GDP in 2004 to 20 percent of GDP in 2006

Meanwhile, the aggregate current account surplus of emerging-market economies expanded about $350 billion,from $297 billion in 2004 to $643 billion in 2006; almost all the increase was attributable to a higher aggregate rate of saving. A significant portion of this further growth is due to China, whose current account surplus swelled an additional $180 billion, rising from 3.6 percent of national output in 2004 to 9.4 percent in 2006.

The combined current account balance of the countries of the Middle East and the former Soviet Union (which include a number of large oil exporters) rose about $150 billion between 2004 and 2006. Again, the increase is almost entirely reflected in higher saving rates, as the oil exporters continue to save a large portion of the increased revenue resulting from higher oil prices.

How about interest rates?

Since I discussed these issues in March 2005, real interest rates have reversed some of their previous declines. For example, in the United States, real yields on inflation-indexed government debt averaged 2.3 percent in 2006 as compared with 1.85 percent in 2004. In the past few weeks, that yield has averaged about 2.4 percent. Inflation-adjusted yields in other industrial countries have also started to move back up after falling in 2005

But ideally with huge capital flows, the interest rates should have gone down. He explains:

Further increases in net capital flows from the developing economies, all else being equal, should have further depressed real interest rates around the world. But as I have noted, in the past few years, real interest rates have moved up a bit. This increase does not imply that the global saving glut has dissipated. However, it does suggest that, at the margin, desired investment net of desired saving must have risen in the industrial countries enough to offset any increase in desired saving by emerging-market countries. ….

He then gives both the +ves and -ves of this global imbalances and the way it can be reduced.

Like this:

1. Ajay Shah points to a new conference in India on Capital Flows and their Consequences. It is being sponsored by National Institute for Public Finance and Policy and the Department of Economic Affairs, Ministry of Finance. It has a website and a blog (ahem) as well.

Joe Lewis bought a 7 per cent stake in Bear Stearns, the investment bank which has lost just over a third of its value after the closure of two of its hedge funds. Mr Lewis is best known in the UK for his stake in Tottenham Hotspur.